Starbucks puts tax avoidance behind it after strong Q3 sales

Starbucks efforts to rehabilitate the UK brand post the tax avoidance scandal have been handed a major boost after sales for the region helped achieve its strongest third quarter revenues to date.

Starbucks

Starbucks’ UK marketing initiatives have helped it achieve its strongest Q3 revenues to date.

The coffee chain revealed the UK, its largest market in the EMEA region, posted postive sales growth in “every month of Q3” with particular success coming from the launch of marketing initiatives and new products such as  the launch of Origin Espresso, new pastries and salads in some stores as well as growth in the My Starbucks Rewards program.

The performance will be welcomed by the company after perception of its brand plummeted in the wake of allegations of tax avoidance last year.

The success helped lift global revenues for the coffee chain, which jumped 13 per cent year-on-year to $3.74bn (£2.4bn) for the three months to 30 June. Like-for-like store sales increased 8 per cent, driven by a 9 per cent lift in the US. Same-store sales in Europe, Middle East and Africa leapt 2 per cent.

Howard Schultz, chief executive at Starbucks, said the results represent the “best-across-the-board” third quarter performance in “our 42-year history”.

Ongoing efforts to stretch its offering beyond coffee after its nascent consumer packaged goods line-up were credited for their part in the better than expected results for the period. The brand has previously voiced its ambition to shed its coffee-only ties and be seen as more a lifestyle brand.

Schultz adds: “Our more than 19,000 store global footprint, our fast-growing (consumer package goods) presence and our best-in-class digital, card, loyalty and mobile capabilities are creating a “flywheel” effecting the relevancy of all things Starbucks, and driving profitability.”

Earlier this week, the Seattle-based business unveiled a partnership with Danone to sell co-branded Greek yoghurt in its domestic market from 2014. It said the products would reach global distribution “over time”. Starbucks also announced plans to expand its business K-cups for Keurig machines as well as pushing its own single-serve espresso machines. It is understood the company’s UK division is looking at how it can communicate its grocery offering more effectively to consumers in an effort to drive take-up.

Separately, the company is assessing how it can accelerate the roll out of its mobile and loyalty programs, which generated nearly 100 per cent year-on-year growth in the quarter in North America, to Europe, China, Latin America and Canada.

Readers' comments (1)

  • When looking at this whole issue, its worth understanding some history and background. The current system of tax treaties and international structuring arose from a desire by many national governments to try and maximize the tax revenue they collect. They did this by recognizing that there are constantly situations where an international corporation may be obligated to pay tax to several jurisdictions on the same revenue (aka double taxation). Of course, this would result in no net revenue and the corporation going bankrupt.

    Therefore in order to attract the good or service to their jurisdiction; try to get as much tax revenue as possible; and try to encourage the corporation to set up some of its physical structure and work force in their jurisdictions, countries like the US, UK and Ireland set up tax treaties between themselves and other countries. It is key to understanding this underlying motivation for the current system. This system arose not out of some noble desire to relieve taxpayers of the "unfairness" of double taxation or even at the bequest of the lobbyists of those taxpayers. It came out of a logical self-interest of various governments.

    With this background in mind, let's look at Twitter, Apple, Google and Starbucks (which are all under fire in the international media for their tax planning).

    -Many US politicians and citizens want these companies to pay US tax on its WORLDWIDE income, including income earned from foreign customers. They argue that while this may not be legally correct, it is MORALLY correct because all three companies were a) Founded, IPOed (or will in the case of Twitter) and has their headquarters in the US; AND b) The citizens of the US are suffering in a financial downturn and "deserve" this money;

    -Many foreign politicians and citizens want these companies to pay more tax on the revenue generated from customers in their country. They argue that while this may not be legally correct, it is MORALLY correct because a) The company is deriving income from tax resident individuals and corporations; AND b) The citizens of these countries are suffering in a financial downturn and "deserve" this money;


    -All four companies want to maximize their net revenues ("gross revenues" minus "expenses including tax" equals "net revenue"). Each company used the tax treaty network and international structuring regime to minimize their global tax burden. As part of this structure they may have to set up operations in places like Ireland; or assigned intellectual property rights to places like the Netherlands. However there are important differences between these companies;

    -Starbucks needed to respond to this "Moral but not legal" obligation demand because a) It has physical facilities in the foreign country which could be picketed or damaged reducing sales; and b) There are many competitors in these countries who could easily service customer needs and decrease gross revenues. As a result, it was logical that Starbucks paid more tax in the UK than legally obligated in order to maintain gross revenues and thereby maximize net revenue.

    -Twitter and Google are different in that a) They do not have or need physical facilities in a given country to deliver its service; b) You can't picket everyone's smartphone, tablet and computer to ensure that no one is not boycotting their services; and c) With all due respect to other search engines, Google is not really realistically worried today about losing customers to its competitors. Same thing with Twitter's lock on "tweets". Therefore, the current controversy is unlikely to significantly reduce people from using their products and services. As a result, it is logical that they will not consider paying more tax anywhere than legally obligated;

    -Apple derives gross revenues from various products (hardware and software) which has competitors. Some of the sales of their products and services derive from physical retail outlets and some does not. The big question is whether Apple products (with their hardware and software integrated) is unique enough to avoid a drop in revenues.

    In summary, Starbucks sells a standard physical commodity which is readily available from other competitors and is clearly subject to pressure. "Search" and "Tweeting" are not a standard physical commodities today and whether through perception or reality, both are far and away market leaders. As a result, neither Twitter or Google are motivated by self interest to pay more tax to maintain gross revenues. Where Apple considers itself (closer to a standard replaceable commodity or a unique product) will determine where they will respond and volunteer to pay more tax anywhere than they are legally obligated.

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